17 October 2018

Force majeure or convenience?

What constitutes a force majeure, commonly known as an act of God?

This was at heart of the recent case of Seadrill Ghana Operations Limited v Tullow Ghana Limited [2018] EWHC 1640 (Comm). In his judgment, Mr Justice Teare begins by stating that ‘drilling for oil is a risky business’, in which oil companies try and protect themselves from such risk by incorporating force majeure clauses into their contracts.

When a dispute arises, the ambiguity of what constitutes a force majeure comes into question, with courts having to ‘look at the precise wording of the relevant contractual clause agreed by the parties to determine its effect.’

This dispute arose when Tullow Ghana Limited hired an oil rig, named West Leo, from Seadrill, for use in three oil fields, known collectively as TEN, and the Jubilee Oil Field (Jubilee). Approval was already given for TEN but Tullow Ghana Limited had merely assumed the Ghanaian government’s approval for Jubilee.

In April 2015, following a dispute between the Ivory Coast and Ghana, an ITLOS provisional measures order was granted to the Ivory Coast, which stated that ‘Ghana shall take all necessary steps to ensure that no new drilling either by Ghana or under its control takes place in the disputed area.’ This was communicated to Tullow Ghana Limited in May 2015 and thus, ongoing work at TEN could be completed but no new drilling was to take place. This was not the case with Jubilee, as Jubilee did not fall under the scope of the ITLOS order.

In October 2016, Tullow Ghana Limited experienced a technical difficulty at Jubilee which significantly decreased the oil that could be processed. Due to this technical difficulty, the Ghanaian government refused to approve work at Jubilee. In light of the fact that costs to remedy this would have been a staggering $335 million, Tullow Ghana Limited decided not to proceed with drilling at Jubilee and thus found themselves in a position where they no longer needed the West Leo rig and terminated the contract on grounds of a force majeure.

Mr Justice Teare stated that, to determine whether Tullow had legitimately relied on the force majeure clause, the contractual terms would have to be relied on, namely the three clauses excusing a party’s failure to perform if:

• It delayed or temporarily prevented the affected party from fulfilling the terms of the contract • It was beyond the control of the party relying on it • The affected party used its reasonable endeavours to mitigate or avoid its effect.

Mr Justice Teare found that, although TEN was affected by the drilling moratorium arising from the ITLOS order, Jubilee was not. Tullow had failed to ‘demonstrate that it had exercised its reasonable endeavours to avoid or circumvent the force majeure’ as they had not paid the remedial costs to try to rectify the issue – something that may have resulted in the government’s approval.

Further, Mr Justice Teare found that ‘Tullow was also bound to consider the interests of Seadrill. It was not entitled to ignore the interest of Seadrill in receiving instructions for West Leo to drill at a well not affected by the moratorium.’

Tullow were found to have terminated the contract for convenience, rather than a force majeure, and were thus ordered to pay Seadrill $273 million, an amount made up of the agreed early termination fee and standby charges.

This judgment serves to highlight a legal principle that is clouded with ambiguity, because it lacks a legal definition. Mr Justice Teare made clear that, when it comes to a force majeure clause, it is not an objective test that must be applied but a careful reading of the contractual terms and, ultimately, an application of common sense. Indeed, as Mr Justice Teare states at the very outset of his judgment – drilling for oil is a risky business. For more information, contact Claire Holford at cholford@hcrlaw.com or on 01189 450 176.